The difference between banking-as-a-service and open banking
What is banking-as-a-service
The FinTech revolution of the last 10 years has created the ‘banking-as-a-service’ (BaaS) industry including companies like Marqeta, Nium, Modulr and Clear Bank. Recently, merchant acquirers like Stripe, Adyen and Checkout have also entered this market.
These companies make it faster and easier to launch a neobank or payments business by offering white label banking services such as holding funds, connecting to local payment systems and issuing cards.
Neobanks can also use cloud banking software providers such as Thought Machine, Form3 or Mambu. These providers offer technology and their customers need to operate the banking service themselves. This is still sometimes called banking-as-a-service because it is banking software operated as software-as-a-service.
Finally, global commercial banks like Citibank, JP Morgan Chase and HSBC also offer access to their banking services by API. They also call their services banking-as-a-service but they usually don’t target neobanks or payments businesses. They mostly target corporate customers who want to directly integrate banking services with ERP or Treasury management systems.
The term ‘banking-as-a-service’ has therefore come to mean three slightly different offerings:
- White label financial services for neobanks and payments businesses
- Cloud-based banking software for banks
- Banking APIs for corporate customers
To add to the confusion, you will also hear the terms ‘embedded finance’, ‘embedded banking’ or ‘embedded payments’. How these terms differ from banking-as-a-service is explained in this article.
What is open banking
Open banking originated from a push by payment regulators to make the financial services market more competitive by allowing anyone to give non-banks access to their bank account.
Credit checking has been the most popular use case for open banking until now. Open banking allows credit providers to instantly check the credit worthiness of customers by getting access to their bank account history.
The ultimate goal of open banking however is to enable account-to-account payments (bank transfers). Regulators are keen to create competition for Visa, Mastercard and Amex by allowing consumers to pay directly from their bank account in shops and online.
The most successful account-to-account schemes have been those where a single operator manages the service across all local banks. Examples are FedNow in the US, PIX in Brazil, UPI in India, iDEAL in the Netherlands and Blik in Poland. Strictly speaking this doesn’t count as open banking because access is managed by a single operator but it does achieve the same objective of making account-to-account payments competitive with cards. For example in the Netherlands, 62% of online payments are made using iDEAL.
What is the difference?
The difference between open banking and the different flavours of banking-as-a-service is explained in Figure 1. In this picture the orange arrow indicates the main difference with the column before.
Open banking is API access to existing bank accounts for account balances and bank transfers only. The bank account owner has to login every time. The benefit is that this access is mandated in many countries so it works for every bank account in those countries. The downsides are that the user experience is clumsy because the user has to login every time and that it often doesn’t work for recurring or scheduled payments, card payments or direct debits.
Banking APIs provide API access to existing bank accounts but now for all banking services. The bank account owner also no longer has to login every time. The benefits are that the user experience is good and that all banking services can be offered. The downside is that it requires platforms to have a commercial relation with the customer’s bank which becomes problematic if they have many customers all using different banks. Other downsides are that today only a few banks offer this service and the ones that do all have different APIs making integration expensive.
White label banking provides API access to new bank accounts for all banking services. ‘New bank accounts’ means the customer needs to create a new account to use the service. The benefits are that the user experience is good, that all banking services can be offered, that it requires only one contract and one API integration and that it works for all customers. Another important benefit is that wholesale banks will share the banking revenues so the provider can now earn money from banking services, in particular card payments, FX and interest on deposits. The main downside is that the customer has to transfer money to a new bank account and that some payments and compliance knowledge is required.
Cloud banking software is software used to operate bank accounts. The provider gets all the benefits of running a bank account (provided they also hold a banking license) but they also have to do all the work.
So which one is best?
Which type of service is best for you depends on what you want to do.
Open banking is great for companies needing to do credit checks. It is not so great yet for payments but the open banking providers and regulators are working hard on improvements. Open banking will never be right for platforms who want to earn revenue from providing banking services though.
Banking APIs may be right for you if you are a corporate customer and you want to integrate your existing bank accounts to your ERP system. It is not great if you are a platform and want to offer services to many customers.
White label banking is the optimal solution for platforms wanting to earn revenue from offering financial services to their customers. It is also a good solution for neobanks who want to be 'asset light' meaning they want to focus mostly on customer acquisition and customer service and are happy to outsource most of their back office. Over time, I expect that some traditional banks will want to go asset light as well.
Cloud banking software is for neobanks that want to control their own back office and for banks that want to replace legacy on-premise banking software with cloud hosted software.
Yordex is a banking-as-service orchestrator. We make it easy for platforms to implement white label banking.
We connect to a global network of banking-as-a-service providers which allows our customers to use the optimal provider in every country. This improves payment margins by over 30% and gives global coverage and resilience. We also offer a range of value added software and services which reduces the time to implement white label banking by over 70%
For more information or a free-of-charge analysis of how much you can save by using a white label banking orchestrator, please contact us.